- International Monetary Fund. African Dept.
- Published Date:
- May 2011
Sub-Saharan Africa’s recovery from the crisis-induced slowdown is well under way, with growth in most countries now back fairly close to the high levels of the mid-2000s. Growth this year is expected to average 5½ percent, and 6 percent in 2012.
There is, however, some variation among country groupings. In most of the region’s 29 low-income countries and 7 oil exporters, the recovery to precrisis growth rates is near complete. The picture is less favorable in the region’s middle-income countries, a grouping dominated by South Africa. Here, growth is recovering more gradually.
This overall sanguine picture must be judged alongside still lingering dislocations from the global financial crisis. The region’s progress toward the poverty reduction Millennium Development Goals (MDGs) has been delayed by weaker employment incomes (including job losses of 1 million in South Africa) and the impact of the 2008 spike in food and fuel prices.
With the advent of another sharp increase in food and fuel prices, the resilience exhibited by the region during the last few years is about to be tested again. These price shocks (coupled with the recovery) are likely to lead to higher inflation in most countries and to deteriorating current account deficits in a number of fuel importers. Wherever pass-through of higher international fuel prices to domestic prices is delayed, fiscal accounts are also likely to be hit.
Now that output growth is generally strong and inflation is rising, the broad direction of both fiscal and monetary policy should be moving away from the supportive stance of the last few years. But there are strong incipient spending pressures that might need to be accommodated in some countries. Fiscal intervention to alleviate the impact of rising food prices should be targeted on the incomes or primary spending items of poor households.
In most low-income countries, tax revenues are projected to be sufficiently buoyant to allow fiscal deficits to be brought down gradually while still accommodating the recent fast rate of expansion in real government expenditure. The planned gradual reduction in fiscal deficits in most countries is appropriate now that the slack in most economies has diminished. In oil-exporting countries, windfall revenues should be saved, with spending constrained by absorptive capacity within a medium-term fiscal framework.
Middle-income countries are a different story. Fiscal deficits are likely to remain elevated because of slower growth. This stance is appropriate if tax revenues are expected to rise strongly once output growth recovers. But, where reductions in tax ratios have become persistent, fiscal consolidation will be needed to ensure medium-term sustainability.
Monetary policy remains looser than desirable in many countries in the region, even before the recent surge in fuel and food prices. Interest rates have failed to keep pace with the cyclical recovery, and policy now needs to move ahead of the curve, particularly where output is back to trend paths. Only in countries (mainly middle-income) where there is still slack is there scope for monetary policy to remain accommodative. Where food and fuel price increases are pronounced, monetary policy should accommodate the first-round response and lean against any second-round effects.
Private capital inflows to the region are back to the rising trajectories of the early to mid-2000s, although only a few of sub-Saharan Africa’s frontier markets have yet shared in the resurgence in portfolio flows as experienced by emerging markets elsewhere. Differences in yields and perceived exchange rate risk seem to be influencing investor preferences between countries for bonds, whereas commodity prices, political events, and a range of other specific factors seem to account for the varied recovery of equity inflows. Frontier markets in the region compare favorably with those in other regions and may still attract larger inflows going forward. In the event, most countries appear to have the scope to use macroeconomic and prudential measures to manage a moderate rebound.
Over the medium term, further adaptations in both macroeconomic and structural policies will be required to sustain and enhance economic performance. For instance, as reported in this edition’s regional case study, members of the fast-growing East African Community lag other successful developing countries in export growth and savings mobilization. Efforts now need to focus on enhancing policy instruments to respond to external volatility, and to deepen competitiveness and regional integration.